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There are a multitude of reasons why investors who are transactional do very poorly relative to the market as a whole. The emotion of what and when is fraught with pitfall. Why do we do it? Because we are wired to see patterns that don't exist, and we love to make a game of everything. Some people spend a lifetime repeating the process only to claim the game is rigged against them. When you are using current info to predict the future, yes it is.

This often happens because we are unwilling to admit that what happens next will be a surprise to most. We take current info and project it into the future without any assumption that changes will occur along the way. We then get defensive about our positions and refuse to hear the new info, especially if we are already behind. We also are wired to think in terms of worst case scenario. We tend to prepare for events outside the bell shaped curve in statistics. We find thin tail events appealing because they have a remarkable payoff that is extraordinarily unlikely. Lotteries survive on this instinct. All of this mental quirkiness...

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We've been getting a few calls about volatility and advisability of reducing stock risks in portfolios. The short answer is that we generally don't do it. The reasons are abundant.

In 2007, fearing a recession, we did have the foresight to raise cash in some accounts; mostly the now Segment all-ETF strategy. That move proved both fortuitous and futile.

It was fortuitous because it deflected a big portion of the downside during 2008-2009. It was futile because, as is typically the case, it felt so good to have cash we missed the optimal re-entry point by a large margin. Our ultimate re-entry was after the bottom had long since passed. Yes, it made it a less agonizing ride, but after taxes were paid from selling and missing the bottom, I doubt we were much better off. We also lost our place in line for a tax-free step up in basis, should any client carry shares to the end of their life. This point is overlooked by most, and it is almost impossible to value, but it surely has some value that should be protected when possible. This should lead to a natural bias to stay...

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Anyone who knows me, knows I love to tell stories from which we can learn real life lessons. Some stories might be pretty lame, but I don't think this is one of those.

I have two clients who both died last year. We'll call them Barry and Alvin. I had worked with both of them for more than a decade before I learned that they actually knew each other from college 60 years before and 2000 miles away. They were born in the same year, graduated college in the same year, married in the same year, and died in the same year. They even both retired in 1994 and lived off their nearly identical $3.5mil nest eggs during 23 years of retirement. As profound as their similarities were, their investing styles were polar opposites, as were their results.

Barry was fidgety and insecure, and Alvin was patient and optimistic. Barry would watch his money online every day and squeal with each nasty market drop, wondering each time if the sky was falling. Alvin barely noticed, and if he did, he was scanning his cash to buy more stocks at each drop.

As time went on Alvin's dividend...

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Investors love dividends, and for good reason. Getting paid to hold a profitable stock is always an added bonus, and dividends receive preferential tax treatment too, being capped at a 23.8% rate. However, dividend yields are greatly misunderstood by many. Many investors think of dividend yields as a return on invested dollars, thus a higher yield implies a better investment. In some ways we are programmed to look for recurring cash inflows as a means for survival, making this lesson a little hard to digest. But a good understanding of how to think of dividends can help deliver better investment results while meeting your income goals.

Let's start with the basics - why do investments or assets earn an income? For a risk-free treasury bond, the income is a compensation for parting with current liquidity. You are parting with a hundred dollars today to receive back the hundred at a future date. If that future date is a year from now then you earn an income of two dollars for the year; if it's ten years away then you can earn almost three dollars each year....


Fidelity upped the ante earlier this week in the mutual fund price war by declaring that two of their index funds would carry zero cost for investors.

This goes to show that investors may have taken the pursuit of low cost to a ridiculous level. Considering the hundreds of funds that Fidelity manages for $Billions in annual fees, giving two funds away for free surely won't break the bank at Fidelity. As a matter of fact, one of the new "free" funds previously had a fee of 3/100 of 1% (.03%). That's $3 per year on $10,000, whoopee! I don't see Fidelity making a splash lowering their fees on their hundreds of other funds, some of which carry costs one-hundred times higher! They're hoping investors won't know the difference. This is likely since the majority of so-called no-load fund investors already believe (wrongly) that these funds were free to begin with. This is unlikely to change much. The scenario feels eerily similar to the old days of free toasters for buying a CD at a bank. The CD may offer an awful return, with awful tax characteristics on interest, buy hey, you...

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Most investors think of stock ownership decisions as somewhat binary: buy/avoid; sell/keep. There's another choice: Sell what you don't own in hopes of it declining. This is called shorting. Segment almost never shorts because the math of ownership is simply too compelling. Yet, with the trauma inflicted by the market decline of 2008-2009, many investors are lured into believing that a tad of shorting could reduce the harm of being "long".

With prospective investors having a built-in appetite for something less risky, many hedge funds and mutual fund companies are happy to oblige with funds designed to add a "tad of shorting". These "Long/Short" Funds sound great in concept. But once again, Wall Street tells a story that the math simply doesn't support.


Several clients have recently expressed concern over new tariffs possibly setting off a trade war. I don't think so. The market has generally shrugged, but downside has mostly persisted since the tariff enactment and rhetoric are both ratcheting higher.

These events give me little concern. The reason is that while I don't know President Trump, I do see a pattern in how he deals with people. He is bombastic. He is aggressive and stern, leaving weaker adversaries with no choice but to renegotiate. This pattern has already yielded tax reform and the seeming denuclearization of North Korea; pursuits abandoned as "impossible" by several past administrations. I have no doubt he will retreat on tariffs once he has gained ground on the trade rules he seeks.

These actions seem to be part of what makes him so scary to those who oppose him. Love him or hate him, let's face a few facts. Politicians want to be liked. President Trump just wants to win. His willingness to be disliked makes him difficult to "be played". His grandiloquent style and disruption of the status quo bring...

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In speaking with investors and advisors over the past few months, I have come to realize that a serious misunderstanding exists when it comes to the facts on advisory fees. One recurring area of confusion is how account level fees and product fees mix with one another. Clients nearly always assume that the account level fee they see on their statement is all they are paying. This myth is further propagated by advisors using terms like "all-in" costs while showing an incomplete view. The fees a client can't see on their statement are often the more costly and complicated of the two. Product fees are found in mutual funds and ETFs and are charged against the funds assets' value before it is reported on an investor's statement. These fees can vary widely from the stated "expense ratio" you are likely to be quoted by a broker.


Gil Baumgarten, president of Segment Wealth Management, was recently quoted in an article entitled 3 Factors That Drive Performance In Your Portfolio published in Forbes.

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Any routine reader of this blog will know I'm a fan of Exchange Traded Funds (ETFs). ETFs are fast becoming the world's most popular investment product. The king’s crown of most popular product still belongs to active mutual funds, but ETFs are on pace to dethrone them.

With rare exception, ETFs are far cheaper to own and have much lower tax drag than most active mutual funds. Most mutual funds are also sold for a commission by the largest sales force, the million or so stockbrokers in the US. The big brokerages (Merrill Lynch, Morgan Stanley, et al) along with the big active fund families (Fidelity, Dreyfus, et al) generally find ETFs are eating their lunch. The reasons are many; mostly indexed construction (eliminating typical fund underperformance); generally lower cost (sometimes by 40x lower); and better tax treatment (often zero declared taxable gain on a 1099). You can clearly see why a near wholesale shift is underway. But this has not come...

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Ok, now people are getting jumpy. The market being down more than 1,000 points in one day gets people's attention. That's happened twice in a week.

Many people are asking whether they should pare back their stock holdings. We generally avoid switching gears too much for several reasons I will describe below. I do agree that equities are at the high end of their valuation range after a decade of decent returns. Several clients also thought that was the case 4000 Dow points ago when I talked them in off the ledge. Clearly that was premature, and I believe remains so today. But let's discuss perspective. Many indices have just recently eclipsed their 1999 highs (i.e.NASDAQ 100; symbol QQQ) taking 17+ years to recover. The Dow Jones 30 traded at 11,130 on 12/30/1999. It was still at that same level in 4Q 2011, twelve years later. That's because two 50% drops applied in the meantime; a feat only seen four times in history. Many say 50% drops are now common, which surely contribute to investor jumpiness. I believe in reversion to the mean, and it's unlikely I will see such abrupt...


As 2018 gets going and the recently passed new tax rules apply, I'm considering how things will play out. The new tax law is a veritable smorgasbord of new rules, some with far reaching impacts.

The increase in the lifetime estate exemption amount from $5.6mil to $11.2mil per person ($22.4mil per couple) is just such a game changer for many high net worth clients. This new, higher exempted amount has a sunset provision to limit its effects after 2025. Yet, with the exemption amount having risen multiple times in the past decade, the original $600k exemption from a decade ago is nearly twenty times that today. The direction is clear toward larger exempted amounts, and, as is often the intent, the backlash from taking away a benefit in the future sometimes results in a permanent codification. This happened when IRA gifts to charity (capped at $100,000 annually) became a temporary provision that renewed year after year, until it too was codified as permanent in 2015.


Many articles are starting to surface acknowledging and critiquing the groundswell movement to passive investment strategies and near-wholesale movement to Exchange Traded Fund (ETF) investing. Several of these articles take the position that this portends doom of one type or another. For the reader's edification, passive strategies are generally mutual fund or managed account investment services where the mandate of the strategy is to match the holdings of a benchmark, like the S&P 500, versus a typical active strategy of picking stocks. The ultimate active manager is typically a hedge fund, so it's no wonder that the threat of low-cost passive investing has raised a few of their hackles, since typical hedge fund fees are many multiples higher. Passive strategies are often accessed via ETFs. Due primarily to lower costs, ETFs have an impressive track record of beating their active brethren; but there are also tax benefits to ETFs as well. Since active managers view this trend as a threat to their livelihood, understandably not everyone is a fan. Will Rogers once said, "Don't...


Bitcoin is all the rage with prices up a whopping 900% for 2017. One bitcoin breached the psychologically important $10,000 mark Tuesday for the first time and then shot up to $11,000 by Wednesday.

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Can you believe it's November already? As the end of the year approaches, some tax tips may be helpful. There are two primary categories I'd like to discuss: Tax neutrality on gains and losses and charitable giving.

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October 9th, 2017 marked the tenth anniversary of the stock market peak in 2007. In the months that followed this peak, the market plunged deeper and deeper until the week ending October 10, 2008 became known as the worst stock market week on record. I took a moment to reflect on the damage this event inflicted.

Since I'm a cynic at heart, of course I thought about the worst that could have happened. Most would say the worst would have been if you invested your nest egg on the day of the peak, October 9, 2007. But really, the worst thing would have been if you had liquidated your investments in March of 2009, after the market had already fallen -57%. Unfortunately, this is precisely the move millions of investors made.

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As people work through the wreckage of Hurricane Harvey, more damage may be on the way, and it won't come in the form of more rain. Investors in municipal bonds may be in for a surprise if they see credit ratings begin to downgrade and the potential for default appear in their portfolios. It's too early to know the extent of the damage and how far the tentacles will reach, but investors should be aware of how these vehicles operate and the possible implications.

The Texas municipal market in general will not feel the effects of Harvey. It is specific municipal utility district bonds and water control and improvement district bonds (MUDs & WCIDs) that are likely at greatest risk. These bonds provide financing for new subdivisions to install roads and various underground utilities. The principal is repaid over time with interest as part of MUD taxes levied against the home and shown on the owner's annual property tax statement.

Homes with outstanding mortgages that are in special flood hazard areas are generally required to carry flood insurance, which helps soften...

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The devastation from Hurricane Harvey is widespread and disheartening. However, the outpouring of aid and the community spirit that have arisen in the face of the tragedy are inspiring, and they seem to be born of the famous, independent, hardscrabble Texan mindset.

As I ponder ways this calamity will play out in the financial markets, I see plenty of silver linings in the storm clouds. I started with the most obvious targets, such as insurers like Allstate, and their stocks have barely flinched. Surely this event will also benefit home improvement stores, such as Home Depot and Lowes, at least on a regional level.

The credit ratings of municipalities in the hardest-hit regions may play out more gradually, though I don’t anticipate long-lasting devastation here, either. The municipal market has endured many similar hits before, and it has proven its buoyancy each time. Galveston municipal bond prices hit the skids after Ike, but they have rebounded nicely. This storm likely won’t leave areas devastated for long, and because homes with mortgages almost always require...

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I have written many past musings on the topic of investor behavior. I point out these human idiosyncrasies and how they play out with the hope that some investors will spot within themselves the issues I raise and possibly make wiser decisions going forward.

One of the topics we have not written about before is the topic of "framing" or "anchoring." These are terms psychologists use to describe a decision process in which what we perceive about a situation today is based on a frame of reference or anchor point in the past. This "anchoring" concept often manifests itself with investors who acquired employer stock while working for the company. It could also be inherited stock where the company's shares might even be considered a family heirloom. One way or another, these factors contribute to an emotional attachment that goes beyond the math of ownership.

In and of itself, an emotional attachment to a stock is not a bad thing. This natural bias toward wanting to keep particular shares can have some positive side effects. The most notable positive is that it increases...

Segment Wealth Management Blog Going Off Half Cocked

That old saying was one of my Dad's favorites when he was describing taking on a task for which one is ill prepared to complete. Such is the case with former President Obama's prodding the DOL to pass the so-called "Fiduciary Rule" requiring brokerages to adopt a fiduciary level of care for clients, but only for retirement accounts.

This is a great idea in concept, and one I embraced as the exclusive way we do business starting nearly seven years ago. Let me be clear, I run a fiduciary-only practice and am subject to a full fiduciary level of care for all client assets, not just retirement accounts. Clearly I think it's a great idea, but then why not all accounts? Why just retirement accounts? That leads me to a question on this hypothetical situation: let's say you inherited some shares in an IRA and you need some general advice on selling it and taking a distribution. What broker would take the risk to advise you when this arrangement oozes fiduciary liability for him and there is no long term advantage for him in an ongoing relationship? What happens if his advice turns...

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The Trump victory came as a surprise to many. Talking heads on election night coverage routinely quoted the "after-hours stock-market futures indicating a 700-point Dow Jones nosedive". They were quick to point out that "the market obviously doesn't think Mr. Trump's economic choices will be helpful". Those same pundits have been slow to declare the market's subsequent blistering 2000-point advance from that nadir as affirmation of the opposite. The small-cap market has advanced nearly 20% since the election. Biotechs, Healthcare stocks and steel manufacturers have seen similar advances and more. Much of this has come at the expense of the bond market, where yields advanced and prices fell at the fastest clip in over twenty years.

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Economics is the place where politics, finance, and personal priorities collide. It is the study of us doing what we have an incentive to do. These forces don't often work in unison; more likely in opposition. Equilibrium is maintained in these opposing forces, and the gaining momentum of one factor normally comes at the cost of the other factors. Understanding this can make for better investment choices. But please don't confuse politics as the force for good.

Over the past decade many clients have argued their rationale for wanting shorter term bonds in light of low interest rates. All the while listening to me say that even lower rates were the risk, not higher rates. Their position is understandable, given how ugly the late 70s were on bond holdings while interest rates skyrocketed. We have an innate fear of reliving that. Yet, I believe those lower-rate-forces are still in play today. However, we see some bumps coming that appear likely to temporarily upset those standing in the crowd on one side of the ship.

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Here are my thoughts on what's going on.

The citizenry of the U.K. voted yesterday to leave the European Union. The seeds of the EU were planted in 1973. It became more formalized with the Euro currency introduction in 1999 and the fall of the Berlin Wall a decade before that. This ushered in a period of more free trade and more freedom of movement across borders. These open borders have culminated in massive migrations out of areas of conflict, such as Syria.

These resulting refugee migrations have strained the cultures and social fabrics of these European countries who have strong regional cultural ties. Add in to the mix Muslim mores that conflict greatly with western culture. Throw in a few demonstrations and religiously inspired stabbings and rapes and you can see the political backlash ripen.

So the issue with today's markets is that speculation has been building that this election would go the other way and stability would reign. A poll last week confirmed a close race with leanings toward staying in the EU. The opposite result is what occurred and...

Segment Wealth Management Blog Open-ended mutual funds

I have written many times about gifting to charity using appreciated assets. Done correctly, this can increase the value of giving to both the receiving charity and the donor as well. I say "done correctly" because we are often asked by investors to make these gifts in incorrect fashion. Accordingly, it is clear that many investors don't fully understand the issues in play.

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The psychology of investing is a life’s work, worthy of its own PhD program. We all have demons in our minds, and taming the demons can be hard, but is a worthy cause. Those demons can cause us innumerable sleepless nights, and for the most part, self-damaging responses. In many ways, we are our own worst enemy.

One of the leading psychologists on the investor’s mindset is a man named Daniel Kahneman. He won the Nobel Prize in Economics in 2002. Human irrationality is his life’s work and the theme of his theories. He has written many books on the topic, but one of his more important achievements revolves around his findings about how we experience the emotion of financial loss and gain. He concluded that people experience the emotion of a loss three times more acutely than the pleasure of an equal gain. So if I were to ask if your $10,000 and my $10,000 were of equal value you would probably say yes. Yet, my response would be that it depends on who had it first. From an emotional standpoint, my $10,000 is really only worth $3,000 if you are taking it from me. But your...

Segment Wealth Management leave the contract intact

As if divorce were not complicated enough, owning annuities can make the mess bigger. As a refresher, these complicated financial products tend to have many twists and turns nestled inside a tax-deferred wrapper. When changes are made to the contract, this can trigger fees, taxes, loss of benefits, and have other nasty consequences.

Many investors believe that the contracts can simply be split in half like any other bank account. It’s generally not that straightforward. Some annuity companies will in fact split a contract in two equal pieces, but that is not always the case. Some annuity companies simply distribute half the value into a second contract. This can cause taxes to be due because distributions usually force earnings to come out first, exposing them to taxation. This can lead to nasty surprises when 1099’s are generated late in the year.

It’s often best to simply leave the contract intact and let one spouse keep the annuity entirely. Be sure to properly value accumulated taxable gain when negotiating for other assets which might be less encumbered....

Segment Wealth Management College Tuition Increasing

When we meet new clients, we often ask questions like "What is important to you?" Educating children and grandchildren is often near the top of their list. Accordingly, we are quick to recommend college 529 plans as a tax free savings vehicle to address the future dollars required to educate those little rascals.

My answer to their next question is often the one that surprises them most. When they ask about how much to set aside, I typically answer, "Set aside today whatever it would take to send them to college today". I get some perplexed looks about why I don't think the money will grow. It's not that it won't grow, it's simply unlikely to keep up with the rising costs of college.

College tuition in the state of Texas has risen 146% since 2003. Average college tuition-only costs were $3,361 in 2003, compared with $8,256 in 2015. In order to keep pace with that increase a college fund would have to have increased from $33,610 to $82,560. A 100% allocation to stocks since 2003 would barely have experienced that rate of return and that makes the assumption that the...

Segment Wealth Management President Gil Baumgarten

Gil Baumgarten sends his beloved shop teacher on a trip to Greece. Read more about Mr. H.B. Taylor in the Houston Chronicle article below.

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With rare exception, I have written for the better part of a decade about why low interest rates are here for the foreseeable future. Investors who heeded that guidance invested in longer term bonds than were fashionable at the time, and have experienced handsome returns accordingly.

Investors are understandably hesitant to commit to long term loans primarily due to throbbing memories of the hangover of the Jimmy Carter years. It's probably unfair to memorialize that time period as Carter-centric, and maybe it could be better described simply as the Arab oil embargo years. Regardless of what we call it, the late 70's and early 80's ushered in a nasty bond market where rising rates were the norm and prior long term bond commitments got slaughtered. Paul Volcker put a stop to that, vowing to break the back of inflation, and so he did. The carry-on effect was that the following thirty years has seen mostly clear sailing for bonds, as 10% begat 8%, which begat 6% and so on. It stands to reason that things will continue in their current direction until they cannot. I always...

Segment Wealth Management Return  Bar Chart

That opening title is a quoted greeting often used by Max Herzstein, one of my favorite clients who died in 2011. Max's hyperbole seems remarkably apropos for today's musing topic: avoiding taxable investment activity.

In a recent "musings" I wrote about the value of long term tax deferral derived from infrequent trading. (read article here) The analysis showed that going 30 years without trading could add over two percentage points to a 9% annual compounded return. That analysis also assumed that all the securities held for 30 years were eventually sold and taxes paid. Even after tax, that longer hold period amounts to another $18,000 of value for each $10,000...

Segment Wealth Management Blog Federal Reserve

Over the years, the Federal Reserve has developed a reputation for being increasingly politicized. The inability of the Executive Branch to replace the Governors at will is supposed to provide insulation from political pressure. Yet, the practical reality is that the desire for friends in high places does in fact cause Fed leadership to pander. The president is eager to cement his legacy, asserting the recovery complete. The end of QE, or the normalization of interest rates is key. Yet, the Fed has been jawboning since 2011 about the need to raise rates, but has not yet done so. They won't this time either.

There are several reasons that make me think this way. First, the hiking of rates would be a boon to foreign investors in our bond markets. The Germans would love an opportunity to buy two year US treasury bonds at 2% when theirs pay -.31. Yes, you read correctly. Negative rates. They put up $100,620 to be assured $100,000 at maturity. In Euros, of course. But that's not all. The inflow of offshore currencies converting into dollars for the purchase would also drive the...

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Bad things happen to good companies. Wading into treacherous waters after bad news can be a good investing tactic. We made such investments in BP in 2010 on the cusp of plugging the Macondo well (the day before, actually). We have also made successful investments in Target after the computer and credit card hacking disaster affecting millions of customers in 2013. We have also stepped on a few landmines along the way that did not work out as well.

We are currently choosing to sit out the Volkswagen debacle. It came to light last week that Volkswagen has been fudging the EPA emissions data

on their "clean diesel" cars and SUV's for a number of years. Unfortunate on many fronts, but in particular for me since I own a diesel Audi SUV. I should have known that a large SUV with 29 MPG and lots of power and almost no maintenance couldn't also have low emissions.

This debacle has already cost the CEO his job. Apparently, employees engaged in a systematic way to skew the actual emission test results by dialing back certain on-board computer settings that produced...

Segment Wealth Management Annuity

Many advisors, like Ken Fisher, make their living by bashing annuities. I too have had some harsh words for annuities, and still often do. They are often over-priced, and some even seem deliberately designed to confuse. Annuities also have some nasty tax consequences, especially for the very wealthy. But annuities can do things that no other investment product can do: Provide income in the absence of principal. This can be super-important for a retiree with limited savings. This can embolden risk taking inside the annuity or with other investments that could be the solution to decent returns. Otherwise, a poorly funded retirement can get relegated to only "safe" investments with limited returns simply because the lumpiness of risky returns can increase the odds of running out of money before one runs out of life.

But annuities also have a darker side. Not only are the fees often very high, but the fees are also calculated in "creative" ways. The devil is in the details. I was recently asked to review an investor's annuity they had purchased in 2007 from a recognizable...

Segment Wealth Management Great Expectations

An old friend, with whom I have never done business, was recently sharing his frustrations with investing and others in my business. It was revealing and a few things struck me as worthy of reflection. This individual was slightly cynical about investing, but wanted to be invested. Remarkably, he had been out of equities since he "got stung" in 2008. He went on to explain how the manager he had hired had "done so great prior to me coming on board, then the wheels came off".

After asking many questions about expectations and discussing costs and the like, I came to the conclusion that the issue causing his problems was not with the former manager, but with this person's perspective and pre-disposition. He was essentially his own worst enemy. One thing was clear; his emotional psyche had been damaged by the experience. Worse, he was now damaging himself emotionally and financially once again by feeling the emotional regret of being out of equities and by watching them scream northward without him. Who wants to bet that he will simply cogitate on the prospect of re-entering...


Segment Wealth Management is pleased to announce that it has been named to the Financial Times 300 Top Registered Investment Advisers, as of June 18, 2015. The list recognizes top independent RIA firms from across the U.S.

This is the second annual FT 300 list, produced independently by the FT in collaboration with Ignites Research, a subsidiary of the FT that provides business intelligence on the investment management industry. More than 2,000 elite RIA firms were invited to apply for consideration, based on their assets under management (AUM). The 630 RIA firms that applied were then graded on six criteria: AUM; AUM growth rate; years in existence; advanced industry credentials; online accessibility; and compliance records.

The “average” FT 300 firm has been in existence for 23 years and manages $2.6 billion in assets.

The 300 top RIAs hail from 34 states and Washington, D.C., and, on average, saw their total AUM rise by 18% in 2014.

The FT 300 is one in series of rankings of top advisers that the FT developed in partnership with Ignites Research: the...


Nothing upsets the IRS like a high-wage earner scoring a break. That’s exactly what a few adjustments to the rules governing Roth IRA contributions permit. But you have to understand the quirks to be able to take advantage of the rules and make the tax provisions work for you.

While traditional IRAs date to the 1970s, the Roth IRA is barely a millennial, born out of tax relief legislation in the 1990s. The biggest distinction with the younger sibling, of course, is that Roth IRAs are funded with after-tax dollars, offering distributions that are tax-free. That’s in contrast to traditional IRAs, which grow through pre-tax dollars, sticking you with the tax bill when distributions are made.

For 2015, taxpayers who are filing a joint return and have adjusted gross income of $193,000 or less hit the standard Roth IRA contribution limit. Single, head-of-household and married filing separately taxpayers can earn up to $116,000 to qualify for a Roth IRA.

But high-wage earners actually have one more path to a Roth: a non-working spouse is allowed to make a...

Segment Wealth Management Blog Company Stock

IRAs are a great tool for investors to defer taxes and continue to grow the full, pretax value of a retirement account. You may already know you can roll over your 401k into an IRA to maintain the tax deferral. But there’s a lesser-known advantage for investors who hold their company’s stock in a 401k. Provided you take the proper steps before you convert your 401k to an IRA, you can receive special tax handling for your stock.

This strategy is called a Net Unrealized Appreciation (NUA) Election. Prior to rolling a 401k into an IRA, a proper plan would simply look at the shares purchased at the lowest price range. You would distribute the combination of the amount of shares you wish to keep to your regular brokerage account, choosing those shares bought at the cheapest prices. This NUA would be a current taxable event, but only on the original investment amount. The profit would be carried over as a long-term unrealized gain, and would receive that treatment going forward.

This does not work well if you don’t want to hold shares going forward, if your position is...

Segment Wealth Management Blog Bubble Serge Melki

Investors are increasingly worried that a bubble is coming in both stocks and bonds. That’s the main findings of a recent fund manager survey by Bank of America Merrill Lynch.

The number of investors who think the stock market is overvalued reached its highest in point 15 years. At the same time, a record number – 84% – think the bond market is also overvalued.

Investors, in other words, are getting antsy. The stock market’s steady rise and ongoing worries about when the Federal Reserve will raise interest rates is beginning to chip away at investor confidence.

So what should a savvy investor do? Well, the best thing may be nothing.

If investors are savvy, then they already have developed a strategy that will help them achieve their financial goals, one that is designed to weather both the ups and downs of the market. While others may be getting antsy, this is the time that savvy investors puts their strategy to the test.

As I’ve...

Segment Wealth Management Blog Exchange Traded Funds tax efficiency

Exchange-traded funds (ETFs) are among the fastest-growing securities available, having surged in popularity in recent years among individual investors. But are they better than traditional mutual funds? For a host of reasons, yes. But given that this is the time of year when everyone is thinking about taxes, let’s focus on one of the most important ones: tax efficiency.

Traditional mutual funds, like those from Fidelity, Vanguard or any other fund company, have a particular type of accounting that limits tax advantages for investors. Accounting rules for these open-ended mutual funds force all shareholders of the fund to be viewed “communally,” sharing in the taxable activity generated by the fund. Purchases and redemptions of the fund are handled by the fund – that’s why they are “open-ended.”

Segment Wealth Management Blog Federal Reserve

Federal Reserve Chairwoman Janet Yellen played coy during her testimony before the Senate Banking Committee Tuesday. She hinted that the Fed may begin laying the ground work for an interest rate increase later this year. Don’t bet on it.

The U.S. has been on a stimulative path for seven years now, with interest rates hovering near zero. This has boosted the markets and aided the growth of financial assets, but it’s come at the expense of savers who count on bank returns for survival.

The prolonged zero-interest-rate environment has also revealed strikingly anemic demand for business loans despite super cheap money. Debate about the demise of the zero-interest-rate policy has stirred since the Fed first adopted it, and testimony like Yellen’s only stirs the pot anew.

But the idea that the Fed will have cause to raise rates anytime soon is wishful thinking. Unemployment has remained stubbornly high – one-third of the states still...

Segment Wealth Management Blog Occam Brett Jordan

Occam’s razor is a principle in problem solving by which you rely on the simplest solution first. The principle relies on the supposition that when multiple variables are introduced to addressing a problem, the more convoluted the path to solution, the more likely the chosen path will be wrong.

President Obama would do well to read up on the work of this Franciscan friar, William of Ockham, who died in 1347. The President is rattling his sword again about regulating financial advice–but only on retirement accounts. He seems unconcerned about advice to investors in regular accounts, which contain the same conflict-of-interest issues and far more money. It’s odd that his proposal only addresses retirement accounts, since IRAs and 401(k)s are generally one-fifth the size of an investor’s “regular” accounts. Unfortunately, he gets the theory of delivery correct, but not the practice. Sort of like his plan last year to tax municipal bond interest earned by the “fat cats”. Great concept, right up to the point where bond-issuing municipalities had to tell him that they are the...

Segment Wealth Management Blog Oil Derricks Photo courtesy of Orange County Archives

By now, you have probably seen many prognostications about the economics of oil and how low prices will go before they hit bottom. These analyses are often self-reinforcing — authors with the most at stake tend to be the most optimistic. In the investment business, we call that “talking your book.” Oil company executives, for example, have been quick to predict a recovery, even as they slash their capital budgets.

I’m in Texas, and I have an oil well (or at least part of an oil well or two), so clearly I want to believe that oil prices will rise. But history suggests otherwise. At its high last summer a barrel of West Texas Intermediate crude sold for $108 a barrel. Today, it’s at about $50, a decline of 54 percent in about seven months.

Sell-offs of this magnitude don’t often lead to a prompt recovery. What makes this drop in oil prices a bit unusual is that it isn’t the result of one factor, but of several coming together. The first, obviously, is surge in U.S. production driven by high-tech advances that combine hydraulic fracturing and horizontal drilling. The...

Segment Wealth Management Blog Energy Matthias Ripp

Last month, I wrote about how low oil prices are likely to benefit the U.S. economy by acting as a tax cut. That’s great for most consumers, but what if you’re an investor in the energy sector?

The price of West Texas Intermediate crude has fallen more than 50 percent since last summer. Oil companies are cutting production, laying off workers and re-evaluating their capital spending as their stock prices fall.

For investors, though, declining oil prices offer the same opportunity as falling stock prices: a chance to buy low.

In the short-term, there’s a lot of disagreement about what oil prices will do and how long they will remain low. The economies of Asia, a key energy consumer, are slowing and Europe is on the verge of deflation. Despite the cutbacks by oil companies, U.S. production is expected to increase at least for the first half of this year, adding to pressure on prices.

But the long-term story for oil and natural gas remain unchanged. Hydraulic fracturing has opened up new...

Segment Wealth Management Blog Health Tax Credits

“Ask a doctor.” It’s a disclaimer in just about any medical discussion or commercial for prescription medicine: If you’re confronted with a health crisis, you probably know you should consult a medical professional. But what about a financial professional?

Medical expenses have become a significant consideration in retirement planning. But it’s not enough to factor the cost of medical care into your investment strategy, you also should be prepared to make financial decisions as events unfold.

If you’re dealing with the declining health of a friend or loved one, for example, it may seem uncaring or inappropriate to make sure they have alerted their financial adviser. But it may be one of the most helpful things you can do.

As a person approaches the end of their life, the emotion of the situation can overwhelm rational thought. Even close family members may be in denial or not thinking clearly. Financial considerations may seem secondary. Heirs may not have a full understanding of the financial issues and the stakes involved.

Illness can also impair a...

Segment Wealth Management Blog Oil Sergio Russo

You probably had other things than oil prices on your mind New Year’s Eve, so you may have missedmy comments in the Houston Chronicle about the impact of lower crude prices on Houston-area companies.

The paper tracks an index of large local employers, which, not surprisingly, have been hard hit by the downturn in oil. The price of West Texas Intermediate crude, the U.S. benchmark, has fallen more than 50 percent since June.

On Monday, it dipped below $50 a barrel for the first time since April 2009. The decline has been remarkably swift, and it pushed the typical oil stock down by 20 percent in 2014. Some have fallen much more than that.

But as I pointed out last month, oil’s decline is good for the overall economy. In fact, it works in much the same way as a tax...

Segment Wealth Management Blog Lady Justice Emmanuel Huybrechts

An appeals court last week struck a major blow against the government’s prosecution of insider trading cases—and that may offer some unexpected benefits for investors.

The decision, by the 2nd U.S. Circuit Court of Appeals overturned the convictions of two hedge fund executives, Anthony Chiasson and Todd Newman. The two were convicted in 2012 for making $72 million in profits for their firms, Level Global Investors and Diamondback Capital, respectively, by trading on tips they got from sources inside two technology companies, Dell and NVIDIA.

The government claimed that Chiasson and Newman were sophisticated traders who knew they were trading illegally on insider information. The appeals court, however, ruled that to violate insider trading laws, the tipper, in this case the insiders at Dell and NVIDIA, had to breach their fiduciary duty and get some...

Segment Wealth Management Blog Gas Prices Roland Tanglao2

There’s been a lot of hand-wringing in the press lately about falling oil prices. The energy industry has been booming in the past few years, making it one of the few bright spots in our economy. And yes, the 40% decline in the price of West Texas Intermediate crude since June has been bad for energy companies, but stories about the struggles of the oil industry are missing the bigger picture.

The decline in crude prices has been mirrored by lower prices at the gas pump. The current national average for a gallon of regular unleaded is $2.71, according to the American Automobile Association. A year ago, the average was $3.25. Pump prices have fallen by about 15 percent just in the past month.

In some parts of the country, the averages are even lower. It’s not unreasonable to believe that some motorists will be paying less than $2 a gallon in the next few months. We haven’t seen prices that low since early 2009.

Economists estimate that for every one cent...


(Photo: Wikimedia Commons)

For many investors, the two biggest enemies are their own fear and insecurity. Even those who have developed a solid strategy to build healthy retirement savings may find themselves questioning whether they could be getting bigger returns. It’s human nature that we focus on what we might be missing versus what we already have..

The problem is that fear and insecurity can lead to disastrous investment decisions. They can cause you to buy or sell investments you shouldn’t as you chase returns that in most cases will never materialize.

There are some out there who prey on these proclivities. I recently saw a news release from the Texas State Securities Board warning about sales pitches urging state employees to roll their pension funds into questionable investments. Pensions, like company-sponsored 401k plans, have no business in such investments because they risk leaving savers short for retirement.

What many don’t realize is that most retirement plans offer some of the lowest-cost investing available. Over time, the savings from...

Segment Wealth Management Blog College Class PromoMadrid

“It’s never too early to start saving for college.” You’ve probably heard that before, but as education costs rise, the word “never” is becoming increasingly important.

It’s not too early to start the day a child is born, or even before they’re born. In fact, it’s not too early to start before any grandchild has been born, or even before the parents are married.

Thanks to the unique properties of 529 college savings plans, future grandparents can start saving for their grandchildren’s college education while their children are still in college themselves.

Sound ridiculous? Maybe not. After all, the Wall Street Journal recently pointed out that setting up a 529 plan for an as-yet-unborn child or grandchild can not only help pay for the rising cost of college but can also help with estate planning.

An early 529 strategy can become an effective way of passing on assets to help your descendants without incurring estate taxes. While your principal is...

Segment Wealth Management Blog NY stock exchange

In the past few months, we’ve seen the sort of market volatility that can leave investors feeling disoriented and frustrated. In times like these, it’s important to keep some perspective and avoid making emotional decisions. Here are five things to keep in mind:

1) In the history of the U.S. stock market, winning years outnumber losing years by two to one. In the past hundred years, the market declined more than 30% in only three of them. During that same period, the market has had 26 years in which it gained 30% or more, and five in which the gains exceeded 50%. By comparison, there’s never been a year that the market has fallen by 50%. Warren Buffett likes to say that “bull markets take the escalator and bear markets take the elevator.” While the speed and intensity of recent declines may make investors uneasy, it’s important to remember that the “building” has gotten higher. In other words, every time the bear market takes the elevator, it’s taking it from a higher floor.

2) Selling stocks to avoid a market downturn invites costly consequences in the form of taxes...

Segment Wealth Management Growth Rate Required to Offset Frequency of Trading

One of the most difficult decisions for an investor can be the timing of taking profits. Gains, after all, are the reason for investing, but realizing gains too soon can be costly. Investors who are too quick to realize gains can cost themselves the benefits that come with compounding.

Many investors turn to mutual funds in hopes that a well-managed fund will relieve them of the worry of deciding when to sell. But the rate at which funds buy and sell securities can have a big impact on their returns.

Then there’s taxes. Realizing gains incurs taxes on those gains, of course. Have you ever wondered over how many years you could have used those tax payments to generate future gains? We decided to find out what rate of return would be required to offset the taxes being paid with various frequencies of realized taxation.

What happens if you sell every year? Or every five years?

To get an idea, we assumed a 23.8% tax rate on all gains and calculated the return required to have a $10,000 initial investment reach $100,000 in 30 years. To keep things simple, we...


Last week, I warned not to let fears of rising interest rates cloud your investment decisions. On Wednesday, we saw why.

While speculation has been building for months that improving economic data would prompt the Federal Reserve to begin increasing interest rates, the Fed threw the market a curve and repeated earlier statements that it will keep interest rates and their low levels for a “considerable time.”

The Fed is continuing to cut back on its bond buying program known as quantitative easing, but the central bank has also made it clear that it doesn’t see ending its stimulus efforts as being synonymous with raising rates.

The Fed has kept rates at near zero since the financial crisis of 2008, and it has attempted to reassure investors by outlining plans of how long it intends to keep rates at the current level.

The Fed will, ultimately, begin moving rates up, perhaps sometime...

Segment Wealth Management Blog Interest Rates Chris Butterworth2

In recent weeks, speculation has grown that the Federal Reserve will increase interest rates by the middle of next year, prompting some investors to re-assess their strategies for low-interest-rate environments. It’s far too early, though, for U.S. investors to panic over rising rates.

For one thing, the weak August jobs report, released on Friday, is the kind of economic news that could cause the Fed to delay any action on rates.

But even if the Fed does decide to act next year, it’s important to maintain a sense of perspective. At the moment cash is paying zero and 30-year Treasuries are yielding 3.5%. Rates, in other words, have a lot of room to move before investors need to rethink their strategy.

Many pundits argue that the short-term bonds are the riskiest because they have the most ground to cover when rates begin rising. But they were saying the same thing three years ago. If investors followed this advice, they...

Segment Wealth Management Blog Pipeline Dan

With Kinder Morgan’s $71 billion consolidation of its affiliates, many investors are wondering if rollup fever will sweep across the white-market for master-limited partnerships.

Houston-based Kinder Morgan Inc. (KMI), the country’s largest operator of pipelines, said Sunday it would acquire three affiliated partnerships – Kinder Morgan Energy Partners, El Paso Pipeline Partners and Kinder Morgan Management – for $44 billion in cash and stock and the assumption of $27 billion in debt and roll them into its corporate structure.

For months, Kinder had been under pressure from investors who worried that the partnerships were using too much cash to pay dividends to KMI. That cash, they argued, could be used to buy or build assets that would benefit investors. Kinder had simply reached the point where its size made it impossible to keep growing distributed cash flow at the rate investors expected.

Initially, some other large partnerships also caught investor...


Too often, investors want to have it all – high yields and low risk. With mounting speculation that the Federal Reserve will raise interest rates, more investors have flocked to short-term bonds and short-term bond funds. Last year, seven new short-term bond funds were offered, according to Morningstar Inc.

Short-term bonds have higher yields than money market funds, but their short duration – three years or less – provide protection against rising interest rates.

When interest rates rise, bond prices fall, especially longer-term issues. Investors who want to avoid that risk may find short-term bonds – those with maturities of less than three years – appealing. Short-term bonds tend to be lower risk than many other investments, but the reduction in risk may not be worth the sacrifice in yields.

The problem is that too many investors fail to consider the short-term nature of the payout, and they wind up “overthinking” concerns about interest rates. A better way to view bond yields is in the aggregate payment over the life of the bond.

Consider a municipal...

Segment Wealth Management Blog TransAlaska Oil Pipeline RickZ

Master limited partnerships are among the hottest trends in the investing marketplace these days. At least 16 MLPs have filed or announced plans to file for initial public offerings so far this year. That’s more than all the MLP IPOs in 2007. It’s easy to see why investors love MLPs. So far this year, the Alerian MLP index, the sector’s benchmark, is yielding about 5.8%, compared with 2.1% for the Standard & Poor’s 500 Index. If you had invested $1,000 in the 50 companies of the Alerian index in 2009, today you would have about $4,000. The same amount invested in an S&P Index fund would be worth about half as much.

But the appeal of MLPs is greater than that.

Normally, I don’t believe in chasing investment trends, but in this case, I believe MLPs remain a solid investment option, one that will persist at least for the rest of the year. To understand why that’s the case, let’s take a look at how MLPs work and what makes them so appealing at the moment.

Unlike corporations, MLPs are structured so that they earn at least 90% of their income from activities...


I have a lawyer-friend who periodically asks for input on various topics. He sent me an email a month or so ago, that generated some thought about annuities. I thought I would share our comments:


Greetings from Downtown Houston.

A few years ago, whilst my bride and I were having a great time in The City (New York City), we passed a person in a subway station who was holding a sign that said “I’m begging for money, which I will use to buy booze. Hey, at least I’m not you.” The dude was doing very well. Why? As you know, most folks appreciate honesty.

So, here we go.


Bad? Good? Maybe?

So I come across this article (in “The Trust Advisor”).

I know you’re busy. But the article’s short and not very deep (sort of like me), and I bumped up the font size to make it even more reader friendly.

Your thoughts: Chicken Sh.t, or Chicken Salad?

[sic] The annuity article goes on to say how Peyton Manning wins games by avoiding taking hits, and correlates that mindset to annuities purported to do the same...

Segment Wealth Management Blog Divorce and Money Jenifer Correa

Divorce is probably one of the most traumatic experiences anyone can endure. This is only compounded by the uncertainty around money and investment considerations in a divorce. In most cases, one spouse is disadvantaged in both knowledge and information, since the more informed spouse usually handles all the family’s business. This leaves the other spouse dealing with a lot more uncertainty and vulnerability. We often find ourselves being brought in as an advocate for the underdog.

Several misconceptions seem to surface often:


Rather than count the ways, let’s just discuss one for today – Tax efficiency.

Traditional mutual funds, like we are all familiar with from Fidelity, or Putnam, or any other fund company, have a particular type of accounting that results in tax-inefficiencies for investors. Accounting rules for these open-ended mutual funds force all shareholders of the fund to be viewed “communally,” sharing in the taxable activity generated by the fund. ETFs on the other hand, are taxed based on each indivudual’s tax basis in the shares, and other investor’s activity does not result in shared taxation. This offers ETF investors a significant advantage when seeking long-term compounded return. Unlike an ETF (exchange-traded fund; aka closed-end fund), open-ended mutual funds are not listed on an exchange. Purchases and redemptions of the fund are handled by the fund, hence that’s why they are “open-ended.” For simplicity, let’s limit our discussion of mutual funds to only stock funds at this point. And let’s call the open-ended fund XYZ Growth Fund.

The XYZ Growth Fund (the fund)...


As friends and foes now line up to criticize the new healthcare law, I wanted to point out the silver lining to this cloud: we get a clear view of a semi-contained micro-system, that (in its current form) will cause its own death and serve as an illustration of why socialism is eventually doomed in its every form.

History is replete with examples of socialism and Marxism ending in economic calamity. France, Germany, and Russia in generations past. Greece and Spain currently, and the Latin version runs live daily as we witness the spectacular disintegration of Venezuela. Unfortunately, this is not the road less traveled. But we humans just won’t learn our lessons the easy way. Each generation feels its superior point of view would enable it to create economic Nirvana (or simply will it to be), where differences between effort and capability, and sacrifice and prudence, claims no victims and we all sing “Kumbaya.” Well, mankind has dealt with these issues throughout the millennia, to this exact same conclusion. Margaret Thatcher was correct when she so eloquently said, “The...

Segment Wealth Management Blog Buying Stock Cheap Priya Agarwal

Investors have plenty to worry about these days. Is the Fed on hold or not? Are rates rising or collapsing again? Stocks look dependable, but 2008′s meltdown is seared into their psyche. What to do?

Many investors say they would be comfortable buying more stocks in a pullback. Did you know you can get paid for being willing to do that? What? Collect a payment for providing an exit for another investor at lower prices than today? Yep.

Most investors are unaware of more sophisticated techniques that are widely used by hedge funds and institutional investors to hedge risks and generate returns. I am talking about selling puts. I am not suggesting it’s for everyone, but simply understanding it can open up your mind to other possibilities.

Let’s say you own a vacant lot and you hear the city will be using the adjacent lot to store trucks for a year. I don’t think they will, and frankly, I would love to own your lot and wait for them to move away anyway. I could provide you peace of mind that I will pay you $950,000 for your $1 million lot if you decide to sell for...


As an investor, you may often feel like the crosshairs of government intent are often squarely aligned on your back. Targeting the wealthy has become political sport. But one of the things you have probably also noted is that many rules crafted by government to ensnare are also often ineffective. Additionally, many rules are also often symbolic; i.e. they sound good in a speech, but may be poorly thought out. They might also serve to reverse other rules that also sounded good.

With a little thought and effort, investors can structure their affairs to avoid several of these snares. One of the easier tools to use in legally creating a counter-offensive can be found in capital gains taxation. Many investors are already aware of the benefits of giving appreciated property to their favorite charities. Qualifying charities are exempt from taxation, so shifting those assets that pose a tax risk for the donor is often quite wise. But few investors are also aware that their children can provide some of same benefits. Just like a qualifying charity that has a large differential in...


The world is all in a tizzy about recent remarks from Ben Bernanke. He let on a month ago that the Fed wanted to bring an end to their Quantitative Easing (QE) activities. This circumvolving game, in which the Fed issues short term bonds and uses the sales proceeds to purchase long-term bonds in the open marketplace, has the effect of artificially suppressing long term interest rates by increasing the prices of long-term bonds. Surely there’s going to be mild panic when he brings a time frame to those comments. That happened recently with his June 22nd talk of “tapering”, and some interest rates have since spiked by a third.

Now surely Mr. Ben is aware that the spike in rates will actually thwart many of his efforts to “heal” the economy. That thwarting will most likely show up first in a decline in housing activity. Higher rates will elbow their way into the purchase equation making for larger payments and smaller budgets. My old nemesis, Paul Krugman, might argue that this will be offset by the increased income that investors will receive from the higher mortgage...


A Pro, or a Con?

Yesterday’s market action was a stunner. At midday, the Dow Jones Industrial Average was up 155 points, or roughly one percent. Within 90 minutes, it had plunged 235 points, closing at -86 for the day. What happened? Well, Ben Bernanke made comments that the Fed may begin to curtail its QE bond buying activity. Obviously, the market didn’t like that. The marketplace has gotten accustomed to a Fed that provides its own economic underpinning for market prices. Steady pressure from the Fed to keep interest rates low could finally be thawing. It’s like watching a drug addict going through withdrawals. Yesterday was the first convulsion. With the market down another 1% today, can you imagine what will happen in the future when the Fed finally announces its actual “plan to act”, as opposed to yesterday’s discussion of its choices of actions? A 3% slide at the mere hint of the withdrawal of Fed support suggests the marketplace thinks the economy would be on its face without Fed intervention. This makes one wonder about the wisdom of owning risk assets with an...


Recent headlines have focused on the seemingly financially insignificant country of Cyprus. The reason this has become a topic worthy of discussion is that Cyprus’ primary industry is banking; and possibly questionable banking at that. Cyprus is rumored to have one of the most lax set of rules on money laundering on the planet. It’s no wonder then that the country’s banks have become a hotbed for apparent illicit deposit schemes of the Russian mob.

Cypriot leadership recently floated the idea of a one-time “tax” (sic Confiscation) on bank deposits. This was roughly 10% for large deposits (over $135,000) and 7% for smaller deposits. Under protest, parliament has revoked that plan. This was for the country to “right itself” financially. European leaders are learning the hard way that “thinking out-loud” is probably not a good idea when all ears are listening. But the concept is eye-opening. Surely, it gives one a glimpse into the mindset of desperation.

Bankrobbery of the Cypriot...


With interest rates bouncing off of generational lows, investors are scrambling to find yield. However, many will find their fingers in the occasional mousetrap as they feel around in the dark, I fear. So some basic discussion of what comprises yield is in order, just to save a few fingers. The term yield means many things to many people. A typical response to the “what is yield” question might be, “what I get back from my investment”. But that response seems to encompass price in addition to yield. What if an investment starts at $100, pays $5 over a year, and matures and pays $101? Is that a 5% or 6% yield? My answer would be that’s a 5% yield with a 6% total return, since cash flow and principal value get blended together. So to me, yield is just the cash flow component. This is where it gets tricky. So what if an investment starts at $100, pays $5, and comes due a year later at and pays off $95. Then you receive a 1099 that shows $5 return of principal. In that case your rate of return is 0%, your yield is 0%, and you got $5 of your own money back.

One problem is...


MLPs Gaining an Advantage

Consistent readers of my musings will hopefully recognize a pattern of forward thinking in what we discuss. An investor who looks at the facts before him and determines the obvious choice will likely face a lifetime of disappointing results and being “outflanked” by those who anticipated the next several moves on the chess board. This often requires some conjecture to gain an advantage.

Since low interest rates have created a competitive landscape for investments with yield, utilities and pipeline MLP (Master Limited Partnerships) shares have garnered quite a bit of investor optimism with their high payout rates. Utility companies such as Centerpoint or Southern Company are rate-regulated providers of power. They almost universally pay attractive dividends on their stocks, with the caveat being that these are very slow-growth businesses. In contrast, MLPs are publicly traded partnerships that look like regular stock shares, but are treated differently for taxes since they are not corporations and are intentionally designed to avoid corporate...


Check out Gil’s article in Texas CEO Magazine

Managing Borrowing & Lending in a Zero-Rate World


As the fiscal cliff seems to have grabbed our attention of late, many have not noticed the post-election slowing of the economy. Several of our clients, involved in industrial supply or construction, have commented on the sudden vacuum they feel in new business. Some have used words like “crickets” to describe how quiet things have gotten. Quiet is not the sound of money. Several of these businesses are leading indicators, not laggards like automobile sales. Cars are bought by those who already feel confident about their jobs. The job that provided that income might have been bid six months ago and finished and paid the month before the worker walks into the dealership. So be careful in taking this week’s Wall Street Journal article on hopping car sales to portend great things for the future.

As we see the great unwind happening on the other side of the Atlantic, we get a glimpse of our future. Margaret Thatcher famously spoke these words twenty-five years ago, “The problem with Socialism is that sooner or later you run out of other people’s money”. If you divide the US...


Now that the election is over, the discussion on tax hikes is starting to take shape. The rhetoric makes it clear to me that tax rate increases are coming. Additionally, the phasing out of itemized deductions such as mortgage interest and charitable contributions is seemingly headed our way as well. It also appears that we may not see estate tax rules for years into the future which are as forgiving as the rules for 2012.

So what should investors do? Investors with substantial assets are already flocking to their attorney’s offices to create trusts and gifts for heirs that take advantage of the $5.1 million individual gift exemption still available through December 31st. Some older investors are distributing their IRA’s since tax deferral has limited benefits late in life and the deferred tax gets hit twice in death if an estate size is higher than the limit. This will seemingly be even easier to have happen in future years, and paying the income tax now would remove those dollars from an estate which might also pay a 55% tax on those dollars if ignored.



Yes, I know the financial planning textbooks are replete with advice toward maximizing the deferral of taxes. But tax deferral comes as a mixed blessing. On the one hand, most of us will be in a lower tax bracket at retirement, so deferring out of say a 35% bracket and into a 20% bracket makes some sense. You also get all that time to compound with no taxes. But it’s not all a bed of roses.

Tax brackets seem certain to rise, and deferring may not be the benefit it once was due to the uncertainty about future brackets. Additionally, a large percentage of IRA balances are invested in stocks and stock mutual funds, which on their own generally have a 15% tax cap. You lose that in an IRA. Furthermore, you can defer taxes on stocks outside of an IRA too by simply not selling them and realizing your capital gains. Additionally, the piled up profits in long-term stock holdings have the 15% capital gains tax forgiven at the death of each spouse. That means unsold stock gains outside of an IRA could go completely untaxed due to current rules on stepped up basis at death. Not so with...


The annual Jackson Hole Economic Summit will begin next week, starting on Thursday, August 30th running through September 1st. Fed Chairman, Ben Bernanke, will give his remarks at 10AM on Friday the 31st. Much hinges on his comments, as the financial world will tune in to get a glimpse of his thoughts regarding Fed perspective and initiatives, as well as possible future economic policy in the US.

Over the years, the Federal Reserve has become an increasingly political machine. The no-replacement job security of the Fed Chairman is supposed to insulate him from political pressure, but we all know empirically that it doesn’t appear to work that way. In my estimation, he will try to paint as rosy a picture as possible without appearing dangerously out of touch with reality. He will want to appear in control, and effective in his past policy efforts. So there should be a fair amount of self-justification, as anyone in his situation would do. Given the economic languishing we all see, he should argue that we are on the right path, we have made all the right moves, and we simply...


The relative attractiveness of Municipal bonds continues to astound me. With Treasury yields dropping precipitously, tax-free municipal yields seem the hands-down winner of the yield game. Much of this is due to large foreign players elbowing their way into the US Treasury market to hide from worldwide financial turmoil. They have bid prices up accordingly on the bond market’s most liquid vehicles- Treasuries. These buyers would not benefit from the tax-free nature of muni yields, and the muni market is far too fragmented and illiquid for the trillions of dollars that are rolling around looking for a home. But this creates interest rate nirvana for retail investors looking for a nominal return with nominal risks. While the muni market is considered liquid, it is very much an “art trader’s market”. The muni market is filled with $50,000 and $100,000 pieces for sale, so bidding in $100 Million chunks is completely out of the question. Accordingly, institutional buyers are mostly absent, except for mutual funds. Normally, tax-free munis yield about 80% of Treasuries. With no Federal...


A Polished Dimon

This week’s testimony by JP Morgan chief, Jamie Dimon, holds some clues to the future. These clues can be used to develop better investment strategies. While much of the questioning appeared scripted, as you could tell from several not-so-literate-bureaucrats reading questions that they seemed to not understand themselves, Jamie Dimon continues to set himself apart as a class act. He is not only very likeable (I have met him many times as a former Smith Barney employee myself), he comes off as very transparent and contrite over JPM’s large recent losses. I long for the days when corporate losses are none of the Government’s business. A lesser-controlled man would have been right to get his back up over this issue, since JP Morgan has paid back all their TARP money, and never needed it in the first place. The tongue biting was palpable. The takeaway is that government intervention in the banking business is far from over. Increased capital requirements and a reduction in risk taking rule the day. The money multiplier, used to create money in our banking...


France elected a new leader last week, and he is a self-proclaimed Socialist. Greece held elections too, but the outcome is less conclusive. These events could be seen as an outright rejection of austerity measures. As one might imagine, trouble could be looming for the U.S. and the rest of Europe as well, since other countries are struggling with austerity measures of their own. Populist leaders don’t have to dig too deep to find large numbers of supporters who believe that benefits really can be free. With the wealthy outnumbered 1000 to 1 in almost every society, you do the math. President Obama will likely benefit from similar looming circumstances in America. I’m not purporting to have any insight to our upcoming election, and I’m not handicapping any outcome. I’m simply observing the popularity of certain lines of thought, and correlating them to investment implications that might make sense.

With America’s version of austerity programs only in the discussion phase at this point, the tipping of the populist hat in many foreign nations would seem to indicate that the...


Sorry for the long delay in producing a new “musings”. Unusually, I did not have much to say.

As I have written in the past, the bond market is vastly larger than the stock market, and the rates on bonds have huge implications for the rest of the economy, and finance in general. As rates have now reached the zero-bound, unusual things are likely to occur. That could explain recent unusual spikes in interest rates. It could also explain the sudden appetite for riskier assets, like stocks.

Most of you know that a bond is a loan that can be traded. The terms are generally fixed for the term of the loan, and the price paid determines the future yield, since the payments in the future are already known. The US Government is a huge borrower, and the seeming certainty of future repayment makes US Treasury bonds the pinnacle for safety. This is still true despite our recent downgrade to AA from Standard and Poors. Surely you are aware that the market for interest rates has been manipulated by the Federal Reserve (and other forces), in order to produce a desired outcome. We...


As with past periods of economic stress, current budget deficits are typical. They are also unsustainable. The deficits we are experiencing are similar to those during the Civil War and two world wars. The past decade has seen a tremendous increase in deficits due to many factors. The wars in Iraq and Afghanistan, along with the domestic wars on poverty and lenders, coupled with low tax rates and low tax participation, have brought us to the brink once again.

The Office of Management and Budget (OMB) reports that the primary deficit (net interest payments minus revenue) has averaged -8.6% for the years 2009-2011. This compares to essentially zero for the period of 1955-2008. The current -8.6% of GDP is roughly identical to the Civil War period and both World Wars. Surprisingly, the New Deal period following the

Great Depression only saw primary deficits of -3.7% of GDP. Our overall deficit is approximately 100% of GDP; roughly equivalent to Greece. While we have more choices than Greece, our choices are still limited.

It would be great to simply go to the rich...


When my kids whine about how hard college is, I sometimes turn a deaf ear. I remember hanging out at the fraternity house, playing Dibble-Dabble in the pool, and Frisbee in the yard. I also had a part time job in the UC (University Center) game room, where I hustled pool and played video games for hours. Now, I still managed to Ace my exams in Economics, and more amazingly, EcoStat. So I still managed to make a 4.0 in my Economics minor, despite wasting tons of time playing games.

One of the better multi-tasking tools I turned to my advantage was playing pool andvideo games while I was on the clock (I was doing research). I was always good at pool (really good), but I also had a soft spot for Pac-Man and Asteroids, which were invented in the late 1970′s. Asteroids was a video-game that had a little space ship that could be flown around on the screen while shooting missiles at asteroids. The blown-up asteroids scored points and evaporated from the screen to make maneuvering easier. The...


I get numerous opportunities to come to this conclusion, but being in the investment business, most people think I’m pro-insurance. If you’ve ever tasted Paregoric, you know it’s only better than the alternative. Shifting risk is very expensive. I have found self-insurance (or taking the risk myself) to be the more profitable choice. Now, I’ve never faced a major calamity either. But even so, large deductibles allow for covering catastrophic losses, and leave the minor claims to be absorbed.

I have several points of reference arguing for larger deductibles. In 1986, I spun out my new Chevy Blazer on an icy road in Boerne. The relatively minor $1700 repair bill was not too bad considering my $250 deductible. Then my agent broke the news that my premiums were going up with the claim, since I was obviously no longer “low risk”. My premiums would rise by $500 per year for three years, with no more claims. That means it was going to cost me $1750 to make a $1700 claim (3x$500 +$250). I withdrew my claim and paid out of pocket. I asked my agent why I did not have a $1000...

Segment Wealth Management Gil Baumgarten Headshot

President Obama proposed this week still another way to stick it to “the man”. He wants municipal bond interest to be taxable to investors who earn more than $250,000 annually. What a great concept on the surface. The pool of buyers of muni bonds is relatively small. They typically are savers who depend on the income, or investors who use them as a tool to offset stock risk. The owners of muni bonds have traditionally been America’s wealthiest investors. Anyway, muni bonds are loans to local governments to build roads and schools and water systems, etc. The interest earned on these bonds has been tax-free for over a hundred years.

Political leaders demonstrate a remarkable lack of understanding in the way decisions are made, and how rules are linked, when they propose capricious solutions like this.

Segment Wealth Management Yield To Maturity Chart

I know I write a lot about the bond market. But bear with me for one more. There are several reasons I do this. First, many of my clients are conservative investors and they have a preference for safety, so I spend a lot of time looking for bonds. Second, bonds are the soul of the investment markets. The reasons are simple. Interest rates drive investment decisions. When we compare risks and rewards in any investment, real estate, munis, stocks, etc., we always compare the possible returns to the “risk-free-return” in US Treasuries. As interest rates have nose-dived as a result of many factors, we can see the psychology of investors showing up in interest rate graphs. One thing you must remember is that consensus is what most people believe. That does not make it correct. As a matter of fact, I think betting against consensus is one of the most predictable ways to enhance performance.

This is a graph of current interest rates in the pre-refunded municipal bond market:

Segment Wealth Management Inflation and Money

People continue to ask me about inflation. Before we can understand inflation, we have to first understand money. Go over to your couch, lift up a cushion, and grab a penny, nickel, dime, quarter, half-dollar, and a dollar bill. Inspect them carefully and set them down in value sequence in front of you. First, let’s understand that if your coins have a date on them after 1965, they are not actually coins, they are tokens. The term “coin” is used for precious metals coins (gold and silver), which have not circulated in this country for nearly fifty years. You will also notice that aside from the penny and nickel, the other coins have grooves on their edges. This grooving is called “reeding”. Reeding has been necessary for over a thousand years, because people and governments alike have conspired to shave or “clip” the coins made of precious metal in order to extract value. Reeding makes it obvious if a coin has been clipped. Back in the days of the Roman Empire, Julius Caesar conspired to inflate his “denarius” coins by clipping the edges of each coin and making new ones with the...

Segment Wealth Management Blog Newton's Law of Motion

Back in ninth grade, you probably learned about Newton’s laws of motion. Paraphrasing, this three part physical law basically says that; A) a body at rest wants to stay at rest, and a body in motion wants to stay in motion, B) The weight of a body determines the force it takes to speed it up and slow it down, and C) Two bodies in motion that come in contact tend to exert forces on each other that are relative to their speed and weight. That last one is best known as “For every action there is an equal and opposite reaction”. In many ways these laws hold true in economics also. For every loan there is a borrower, plus interest. Every dollar that gets spent on one thing, it is not available to spend on another, unless you can print your own money. The more you borrow, the less likely you can repay, and the more it costs you next time. Those borrowing days seem numbered.

The relative risks of lending to the US government are rising. Despite Fed policy which has pushed interest rates to unprecedented lows, the likelihood of a US default has never been greater. But this could...

Segment Wealth Management Blog Municipal Bonds

Embrace the risks you see, fear the ones you can’t see. Embracing risks we see would have us buying municipal bonds because the back-breaking pensions are obvious risks. Anticipating the worst, many bonds have lost 20% of their value. Will the worst come to pass? Probably not, and at least not likely before most of my munis have already come due. This pension thing is a 10-year-from-now problem, that needs mending today. Do we have the guts to stand up to the unions? If you want to see what kind of blight occurs from heavy unionization, just look at Detroit with 21% unemployment, or the steel industries in and around Allentown, Pennsylvania, where unionization finally killed both Bethlehem Steel and LTV a decade ago. That area remains blighted today. Fearing the risks we can’t see would have us selling our Chinese mutual funds, because the future looks mighty rosy, huh? Remember how rosy Japan was in 1988? They were buying all of Hawaii, and Palm Springs too. Their stock market peaked right about then, and then went into a 20-year tailspin that wiped out 80% of everything. They...

Segment Wealth Management Blog Federal Reserve

When Quantitative Easing version one was announced a year ago, I wrote in these pages that they would be back for more. The reason I knew so was that the Government tends to give us bad news in small bites. It does so for several reasons. Let’s face it, the political process is not set up to be forthright. Politicians tend to over-promise and under-deliver. This is just that process in reverse. This is true no matter which party is in charge. The backlash from really big bad news is larger than the backlash from a succession of smaller pieces of the same bad news. Vinegar tastes better when you’ve had a pickle first. This is all human nature, but it’s effective at keeping the natives from revolting. It also engages us into a process where we are forced to throw “good money after bad”. We might not have agreed to that upfront if we had all the facts. So there’s the why’s, let’s talk about the what’s.

Quantitative easing is the process of the Government buying its own bonds in the open market....

Segment Wealth Management Blog Whose Money is it Really

Amidst all the debate about taxes, a certain amount of confusion abounds based on perceptions of ownership. One worldview holds that we are all in this together, and certain”lucky” individuals happen to control much of our “collective” money and they should be willing to share. Another worldview is that what I may have earned is mine, and you keep your grubby fingers off. Some people spend a little time on both sides of that view, and often change positions based on how the topic at hand impacts them directly. This can lead to “What’s mine is mine, and what’s yours is mine.” It can be manic and conflicted, sort of like one of my former female supervisors who would make a big deal of the African animal heads on my wall and what a shame it was that I had shot them. Those words coming from her as she stands before me in her mink coat. She justified the difference because her minks were raised specifically to die for her coat, while my animals were wild and not intended for such a fate. She also smokes and runs...


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